Why would Uber’s business model impact the standard billing method of established professional firms?

An interesting observation was made on a radio program I was listening to last night. Apparently a number of taxi operators in larger cities in the US are now doing all their pricing up-front for the passenger before they start the trip. This means that the old method of turning on the meter and charging what the end result was is becoming redundant as the taxi operators have worked out that the customer wants pricing certainty. If the cabdriver doesn’t provide it, the customer will go to Uber…

The disruption Uber has caused within the taxi industry globally has been well documented, however, it did get me thinking.

With increased penetration of up-front pricing for work that used to be based on an set (arbitrary?) rate by time, customers from all segments of the economy are going to start to question the logic of entering a transaction with no known end price. Where very other industry is going down the path of providing pricing certainty on commencement of a piece of work, why do the professions still believe they are immune from the impacts of the change?

In many respects, the taxi industry is similar to the professions – time by rate and it doesn’t matter to the provider how many hours (or miles) are spent on a job as they will know they are getting paid “for what they do”. The sad thing is this has been ripe for exploitation (who hasn’t been in a taxi which “took the long way” to get somewhere?) Unfortunately, it doesn’t create a great experience for the user of the services as they just have to grimace and wear it.

Disruption in pricing and business models is going to increase and roll through many other industries and professions that used to work on the time by rate model. Customers are experiencing more of it and are going to demand more of it.

Those firms that start on the path to pricing on purpose will see themselves gain a competitive advantage – those that don’t will wonder what the hell happened.

Have a look around the Verasage site – there’s lots of rich material in here (esp recommend a solid listen to Ron and Ed on their “The Soul of Enterprise” podcasts).

The professions are going to become “Ubered”. I hope they are ready for it.

With more firms moving to the Verasage pricing model (good on them – great move), we occasionally come across examples where firms haven’t really arranged their systems and processes to support the delivery of services.

We are fortunate enough to be picking up a new customer (via referral) from a competitor who has “productised” their offering and built their model around cloud accounting. Terrific.

The customer in question has been working with their accountant for many years and supported them as they moved the model to an agreed pricing platform (I don’t believe based on our discussions with the customer that the firm is anywhere near value pricing their services). They had been paying the monthly direct debit to cover all the services required. They had been providing all the information required to enable the firm to do what was required.

Now, put yourself in this customer’s shoes. They’ve been paying a monthly amount to the firm for the various compliance obligations for the past three years. However, they have only just now received the financials and tax returns for 2013/14 and 2014/15. Are they frustrated? Bloody oath.

To be clear here, they are pretty happy with the quality of the work they were getting – when they got it. They were driven up the wall by the constant chasing up to get information from the firm. They like the accountant they have been working with. But they feel like they have been “left for dead”. The experience they have had has been very unsettling for them. As they said – “we’ve paid for the work, why hasn’t it been done?”

Many firms are making the move to productising their offerings and moving more to an agreed pricing model.

They fall down badly though when their focus is on marketing and “brand building” rather than service delivery.

Having your customers pay into your account regularly is great for your cashflow. When you’re not delivering the services agreed to under that model, you have a problem.

The firm our new customer was going to is widely lauded as a “leader” in its field. It is held up as a paragon of virtue and “a major disruptor”. The problem is, the lived experience of their customers doesn’t support the hype.

We will be making sure we deliver our agreed services to them on time and support them up hill and down dale. We will also regularly check in with them to ensure they are happy with our delivery and service. The great thing is, once they get embedded into our firm, they are wanting to refer a whole heap of their mates to us who are also with this “progressive” firm as they are all having the same experience.

The other thing is, we are value pricing the engagement with the customer. They are wanting a heap more real-value services and they are more than happy to pay for them. This is money the “disruptive, progressive” firm was leaving on the table by productising their offering. The firm’s focus wasn’t on the customer, and that has created a marvellous opportunity for us.

When you do go down the path of changing your model, please ensure that you deliver what you agree to and keep the customer in the loop. It’s no use being a “leader” in the industry/profession if your walk doesn’t match your talk.

You also need to have the value conversation with the customer and listen to their needs and wants.

Only just received the 2015 copy of the “Good, Bad Ugly” report on the Australian Accounting profession prepared by Business Fitness. Makes for interesting reading.

There are a couple of points that are worth repeating:

revenue per partner has decreased by 8.9%;

average client fees have reduced by over 18% in the past two years;

for firms using timesheets, productivity is falling;

lower marketing spend over the past three years; and

6% increase in firms using outsourcing (reasonable number, but not very many firms are doing it).

There is one very telling comment made in the introduction to the statistics in the report (my highlights):

When analysing the 14 years’ worth
of data relating to high-performing
firms, we can conclusively say thatproductivity based on chargeablehours has no correlation toprofitability.

Having just returned from the Verasage get-together in Boston, it has become even more apparent that the old models of firm management are not only redundant, they are dangerous. Much of the discussion at the symposium related to the way successful firms focus on relationships – both internal and external. This has to do with building, maintaining and honoring decent relationships. Not relationships where everything is about flogging the crap out of your people and billing the hell out of your clients. Relationships which are based on trust, accountability and common goals.

Having seen the damage done by the Almighty Billable Hour and looking at the impact this approach has on the cultures of firms, it amazes me that so many firms still use this model.

There is change already here in our industry and, as the GBU report reveals, this change is having an all-pervasive impact on our profession. Either adapt or die.

I recently posted about a seminar I attended last week. The feedback I have received from that post has been significant. The responses have ranged from “Oh my Lord – that’s us” to “so, there is a way forward”. Great, but I want to concentrate on the first type of replies received.

So many firms understand that the way they operate and their business model isn’t great, but it’s all that they know. To try and move them to a new, more effective model takes a great leap in mental construct on behalf of the owners and managers in those firms.

One of the responses I received was from a bloke I know well who has just taken over as CEO of a professional knowledge firm. Well established, reasonable size and “good, traditional” brand. And he is frustrated up the wazoo!

It would appear from his email that the following issues pervade the organisation:

staff are rewarded with bonuses for hitting “productivity” targets;

The transfer from WIP into debtors (you know – actually billing the customer) is fraught in that, once the bills are raised, the customers get pissed off;

Consequence of this is that a lot of work remains in WIP as the senior people responsible for billing the WIP are too scared to raise the bill as they don’t want to have to deal with an angry customer;

Debtors ledger is out of control as there are a large amount of accounts “in dispute” which means that the whole thing is taking a massive amount of time and effort to clean up.

Now, from my view, this appears to be the antithesis of everything a professional knowledge firm should be. Let me posit my view of the warped thinking that enables such an environment to exist, let alone continue:

Productivity

We want our people to be working – agree on that. But, do we want them to be working on things that make a difference to the customer and are valued by the customer or do we want them doing things that waste a heap of time on customer accounts? The behaviour you reward is the behaviour that continues. By tying rewards (bonuses) to productivity targets, we are encouraging our people to bill as much time to the Holy WIP Ledger as possible. The argument goes that, when we record everything, it gives us a basis for billing everything to the customer (more on this below).

But what is the real message that we are sending to our people when we bonus (often ridiculous) productivity? Is it a message about effectiveness? And is it really a message about efficiency? Too many times, firm leaders sprout on about efficiency but the bonusing system actually penalises people from working more efficiently as their productivity targets won’t be met (the thinking goes: if I do this job more quickly, I won’t spend as much time and therefore, I stand less chance of getting the bonus). Where is the incentive for them to be more “efficient”?

As part of this system, you get the inevitable build up of your Holy WIP Ledger. Many firms see this as a “lead indicator” (as per last week’s post) when, in fact, it is a wish list that often bears very little resemblance to collection.

The other message you send to your people with the focus on hitting production targets as far as time spent is that they will only see a customer as something to be billed, not valued. The training that occurs as a consequence is that the “up and comers” get taught that to get ahead, you need to focus on pleasing the partner/manager with high productivity rather than pleasing the customer by delivering great outcomes.

As an aside, it is often the case that the less senior people very rarely (if ever) get to meet with the customers. How is this going to play out in their career development? How is this going to assist them with understanding the file and the customer needs? All information is “filtered” through the senior people before it gets to the actual “doers” of the work. The outcome – they flog their guts out to get promoted and then have no experience in dealing with customers face to face. I know of one firm in town here where the only people who see customers are the partners. Talk about rate limiting factors! An obvious outcome of this is that there is more rework required and heavier partner involvement in getting a file “customer ready” as the instructions are, more often than not, “lost in translation”. This though, in the warped world of timesheet based billing, is good – more chargeable hours to bill, higher “productivity” and a bigger Holy WIP Ledger.

Holy WIP Ledger (HWL)

So, we have a whole heap of people billing the Holy WIP ledger as hard as they can as this is the basis on which they get rewarded. The HWL is seen as a current asset in the books of the business and the financiers and owners of the business see it as “money in the bank”. All that needs to happen is for it to be billed.

Herein lies a bit of a problem. I have yet to meet with a firm where they state, honestly, that the HWL is fully recoverable. I know of one firm I have been dealing with who ran a HWL that was a pure estimate. They had timesheets to (sort of) back it up, but they knew that they were all rubbish so they just did an estimate. It was probably as approximately right as the timesheet based one anyway.

I recently did some work for a customer in a professional knowledge firm regarding the exit of a Partner. The HWL was obviously an issue to be addressed as the approach they were considering was one based on a mixture of profit and net assets. To get a true picture of net assets, there needed to be a full review of the HWL as everyone recognised that it was not valid and certainly not all collectible. In this circumstance, I suggested that we not go through this process. Instead, we developed an approach which looked at what the exiting Partner was happy to receive for his equity and what the continuing equity holders were prepared to pay for the share. As I said to the Managing Partner – “We can go through the whole process and get a result. The real risk here is, whilst it might be very right as far as the number goes, someone is likely to be pissed off”. The approach we used meant that my business didn’t get a whole heap of extra money for going through the valuation process, but, we did ensure that the Partners (exited and remaining) have kept very very good relationships and our customer very much values the creative approach we have adopted to solve their problem. In short, we provided value rather than a number. And we have further strengthened our relationship which will lead to more referrals and customer longevity.

The HWL is never right. The term in most professional firms is “lock-up” – how many days the firm has “locked up” in WIP and debtors. Often time, this number is horrendous – I know of some firms who have nearly one year’s worth of revenue “locked up”. For what purpose? You can’t spend it as it’s not real. Why bother measuring something that is so subjective as to be useless?

Debtors

To get a bill done from your HWL, it needs to go through a process. Often, it will be a senior person or Partner who goes through this process. More often than not, they will sit down and agonise over the process “If I bill them what’s on the HWL, they will have a melt-down”. So, what happens is that a bill will be raised against the customer for some portion of the HWL balance outstanding – in effect, what the person doing the billing believes they can get away with. Conversely, if you do bill them for everything that’s on the HWL, you are almost guaranteed to get a pissed off customer on the phone three days later (or, worse, never – as they quietly leave and have no intention of using you again – or paying your bill). There is no positive outcome that arises from this. For anyone.

Now, the current thinking with regard to this is that firms should budget for “write-offs”. In other words, they are saying (in words and deeds) that they know the HWL is crap. But they then hold that the basis of their charging of the client is on time spent. So, if the client has agreed to appoint them on time spent and they don’t bill the full time, are they really engaging them on that basis or on a “best estimate” at the end of the job? This is where “estimated ranges” of accounts come in to it. The client is told the cost of doing the work will be in the “range” of (say) $5,000 and $10,000. The client hears “$5,000”, the Partner hears “$10,000”. When the bill ends up being $8,000, both parties are pissed off.

What happens more often than people care to recognise is that there is a lot of “stuff” on the HWL that the senior guys are just too scared to bill. I have seen some aged HWLs which record work done up to two years prior that is yet to be billed. Seriously? Is it ever going to be billed? Or is it just there as a tacit admission that the system ultimately doesn’t work? This then leads to other KPIs in firms about the ageing of HWL. Most of these are there but not adhered to. If the WIP isn’t billable, write it off – with all the “appropriate” consequences.

But, back to the staff posting time to the HWL. How do they feel when the time they put in to a client is then written off? Where is the feelgood out of this? For anyone? What is their thinking at the end of a job when, they are encouraged and incentivised to record all the time only to have it written off? How will they think about the Manager/Partner who has “done this to them”? What message does it send about the “system”?

So, after much navel gazing and internal brinkmanship, the bill is sent out to the unsuspecting customer. The customer gets angry. Now, one of two things happens. The customer ring the Partner to have a whinge about the bill – the firms sends out a detailed HWL report to the customer detailing everything they have done (including the 15 minute phone call – billed as 18 minutes – where the customer recalls at least half of it was spent discussing the football results) for the period the bill covers. Guess what, they get more angry “They’re charging me for what?” Then they start to do the maths. “If he is $500 per hour and he spent 8 minutes talking about the football, he wants me to pay him $100 for that?” Not a great outcome.

Source: geektoauthor.blogspot.com.au

The other thing that can happen is that the customer simply doesn’t pay the bill. So, they start to get harassed by the ever-vigilant accounts department in the firm. The “friendly reminders” come out, then the “is there a problem” letters and so on until the letters get more threatening. Really good, positive stuff about customer engagement through this whole process.

At the end of the day, it gets nasty and people start defending positions. The firm will (usually) relent and write-off a part or the whole bill or, sadly, take the customer to arbitration. On this note, I remember a number of years ago when Ron Baker did his “Firm of the Future” tour around Australia. During this tour, I met with a number of the Legal Services Commissioners from various states around Australia. Their major source of work? Fee disputes. Their fervent wish was that all firms priced up front as the firms that did this hardly ever had a fee dispute.

So, we have a debtors ledger that is somewhat suspect as to the real collectability of the balance. Which means, when coupled with the HWL, the “lock up”metric used by a number of firms is inherently questionable.

After all of the above, is it any wonder why my firm dumped timesheets in 2007? It has saved innumerable hours, it has reduced customer complaints and has meant that the team in here are far more focused on delivering positive customer results rather than inputs. As stated above, the behaviours you get in your firm are the ones that you reward. Is your reward program incentivising the right behaviours? Is your firm business model one which is team and customer focused?

There is a better way of running a professional knowledge firm. Far less stressful, more enjoyable and one where you actually want to come to work. if you look after your people and customers, the profits will (generally) look after themselves.

The frustration of firm management can be reduced and/or removed. There are a band of highly experienced guys and girls at the Verasage Institute who can help you make the move. But you have to make the first step. I strongly encourage you to do so.

It isn’t about survival of the fittest. Darwin actually held that the most adaptable were the survivors. So, are you and your business adapting or are you heading down the path of the Dodo?

The current environment is one where there are so many changes taking place that the firm of 20 years ago will find it hard to compete. I know looking at my business and the work we do that to produce our current output, 20 years ago we would have required a heap more people and resources. Thankfully, technology has developed and enables us to create the results etc that our customers want and need.

But, there are two other components that are vital – your people and your customers. Unfortunately, a lot of firms “out there” have taken on (some very grudgingly) the technological change, but they have made few, if any steps, toward adapting their approach to their people or their customers.

Most of my thinking here comes from the “Growth Curve” approach which looks at “Three Gates” – people, process and profit. The technology has helped us deal with and adapt to the process gate, but I am seeing very little in the way of adaptation to the profit or people gates.

The profit gate needs to be adapted to by looking at the way that you engage with your customers, the service you offer them and the methods by which you price and they value what they get from you. The arcane approach that is the timesheet is becoming less and less popular (as can be evidenced by a brief review of other posts on this site) and customers are demanding more certainty, clarity and comfort that they are not signing on to an annuity stream for the advisor whereby they are being charged and billed for the advisor’s inefficiency or learning. In effect, given the timesheet places the customer and the advisor in directly opposed positions, the customer is now waking up to the fact that they want to know in advance what the price for the work will be. Those firms that do not adapt to this emerging reality will find it very difficult to retain or attract customers where other firms out there offer this as an alternative.

The people gate is the other area where firms are finding it difficult or are not wanting to adapt. The blunt object that is the timehseet that is used for performance management in many firms is rapidly becoming redundant. As an example, we recently advertised for an accountant and one of the headlines in the ad was “no timesheets”. We have had some sensational applicants for the role who are currently working in accounting firms in town where they are managed and measured by the timesheet. I don’t know about you, but if my performance is being measured in 6 minute increments, it is going to be fairly meaningless to me. I want to be judged on results and outcomes. Inputs are irrelevant. Hence – particularly with our Gen Y guys – our people want to be and remain relevant and highly valued based on what they have added to the business, not how much time they have spent doing it.

Many of the firms with which I speak are afraid of moving from the timehseet and adapting their business model to what the world is slowly going to demand of them. These poor bastards are going to be wondering what hit them in about 5 years’ time when it will be all to late.

They will have few staff and fewer customers but they will be able to account for every single minute of their day.